KeyStone’s Your Stock Our Take: Goodfood Market Corp (FOOD:TSX) and Alphabet Inc. (GOOG:NASDAQ).

This week in KeyStone’s Stock Talk Podcast, we discuss the current market environment that has been influence by fears from the Coronavirus and Warren Buffet’s annual newsletter released to Berkshire Hathaway shareholders.

In our Your Stock Our Take Segment we answer two listener questions. The first is a high growth online grocery company, Goodfood Market Corp (FOOD:TSX) – which delivers fresh meal solutions and grocery items that make it easy for 230,000 members from coast to coast to enjoy delicious meals at home every week.

Our second company is one of, if not the biggest business success stories of the past couple decades, Alphabet Inc. (GOOG:NASDAQ), the world leader in online search and advertising services. The Google segment offers products, such as Ads, Android, Chrome, Google Cloud, Google Maps, Google Play, Hardware, Search, and YouTube, as well as technical infrastructure. It also offers digital content, cloud services, hardware devices, and other miscellaneous products and services. We let you know if this tech giant has more room to grow.

Coronavirus Fears

Two factors at play:

Number 1: One thing we know is the market hates uncertainty. The possibility of a global pandemic, however remote, will cause uncertainty, so it is not surprising that markets have pulled back.

There is an economic impact in China – For example, Shanghai Disney, a joint venture between Disney and the Chinese government, which is packed on a regular basis, is shut down at present.

Whether the Coronavirus spreads globally and impacts commerce, still remains to be seen. Historically, this type of events have isolated impacts in a quarter or two. Perhaps this case will be different as the Cornoavirus has certainly already spread more than SARS for example, but humankind is likely more prepared to deal with this type of situation.

While it may cause quarterly fluctuations to commerce, if you are buying businesses with solid profitability and cash flow, these events are most often seen as blips 2-5 years forward. So if you own the Boyd Group or Brookfield infrastructure in your portfolio, you should sleep well at night knowing 2-5 years forward, these businesses will continue to prosper and your shares in these businesses should move higher along the journey.

Number 2: Generally higher multiples.

 

Spring 2020 Stock Investment Seminar Cities

Kelowna – March 31, 2020

Calgary – April 1, 2020

Edmonton – April 2, 2020

Vancouver – April 7, 2020

Langley – April 8, 2020

Victoria – April 9, 2020

Markham – April 14, 2020

Oakville – April 15, 2020

Montreal – April 16, 2020

 

Your Stock, Our Take – Question

Google posted its quarterly results a couple of weeks ago. What do you think but the numbers and would Google make a good investment over the next 2 to 3 years?

  • Art – via email.

Your Stock, Our Take

Alphabet (GOOGL, GOOG: NASDAQ)

Current Price: $1,396

Market Cap: $980 billion

What does the company do?

Alphabet Inc is the parent company of Google. Google is of course best known for internet search and owns an estimated 92% of the internet search market. In addition to search, Google also owns Youtube, Google Cloud Computing, which is the 3rd largest cloud provider in the world, as well as a large portfolio of other applications and businesses, including gmail and the Andriod operating system. The parent Alphabet also has a business segment referred to as “Other Bets” include includes more emerging, non-profitable, technologies and businesses, such as Waymo, which is an autonomous driving technology company.

Key Points:

The share price is up about 24% over the past 12 months. Shares have dropped 7% over the last week due to overall market volatility.

Recent Financial Performance

The company put out its 2019 fourth quarter and annual results a couple of weeks ago.

  • Fourth Quarter Results:
    • Revenue increased 17% to $46.1 billion in the fourth quarter, compared with $39.3 billion in fourth quarter 2018.
    • Operating income increased 13% to $9.3 billion.
    • Earnings per share increased 20% to $15.35.
  • Full Year 2019 Results:
  • Revenue increased 18% to $161.9 billion.
  • Operating income increased 24% to $34.2 billion.
  • Earnings per share increased 12% to $49.16.
  • Balance Sheet
    • Cash rich balance sheet with cash and equivalents of $109 billion and minimal debt of only $4 billion.
    • Net cash per share of $150; over 10% of the share price in net cash.
  • Valuation:
    • Price-to-earnings of 29 times trailing EPS; 26 times on a cash out basis.

Conclusion

 We like Alphabet and it’s a company we have been researching for a while and we have come close to recommending in the past. Although the company makes the vast majority of its revenue from ad sales, it is well positioned in very attractive technology themes like AI, cloud computing and internet of things. Over the past 1 to 2 years, we have elected to recommend other U.S. tech companies with exposure to these themes which have outperformed Alphabet.

One risk I will mention which applies to many of the big tech stocks is that Alphabet’s regulatory environment can change rapidly and has been very politicized. The company has been subject to some very large fines which have result in earnings volatility. For example, in 2018 the company recorded a $5 billion fine to the European commission.

But Alphabet does check most of our boxes. Its highly profitable, growing, has a strong market leadership position in its space, a cash rich balance sheet and trades at a reasonable valuation. Just touching on the valuation discussion, we had Amazon as a Your Stock Our Take last week. Amazon and Google both have relatively similar growth in revenue and yet Amazon trades at a price to earnings valuation of over 100 times while Alphabet trades at 25 to 30 times.

One of the things we are doing right now in our U.S. research is putting together what we call a cash rich report. This is an analysis of virtually every profitable, growth stock in the U.S. that also has a significant net cash balance. We will be included likely around 100 to 150 companies that fulfil our basic criteria in the report. This will potentially result in 1 to 3 new recommendations. Alphabet will certainly be included. I don’t know right now if it will be a recommendation but this is something we are looking at.

 

Your Stock, Our Take

Goodfood Market Corp (FOOD:TSX)

Current Price: $2.89

Market Cap: $168 million

What does the company do?

Goodfood Market is a leading Canadian online grocery, delivering fresh meal solutions and grocery items that make it easy for members from coast to coast to enjoy delicious meals at home every week. Goodfood has 230,000 active subscribers.

Recent Financial Performance

2019 Financial Results

  • Revenue more than doubled in Fiscal 2019 from the previous year to reach $161.3 million
  • Gross margin increased 4.2 percentage points to 25.0% on record gross profit of $40.3 million for Fiscal 2019
  • Net loss reached $20.9 million for Fiscal 2019, an increase of $11.5 million.

Q1 2020

  • Revenue increased 90% to $56.3 million.
  • Adjusted EBITDA margin reached -6.5% compared to -13.2% this quarter last fiscal year, an improvement of 6.7 percentage points, building on solid and consistent margin improvement
  • Generated positive cash from operations of $1.5 million; continuing to finance growth with company-generated cash flow
  • Solid financial position with cash, cash equivalents and restricted cash of $47.0 million
  • Reached a milestone of 230,000 active subscribers as at November 30, 2019, a net increase of 30,000 quarter-over-quarter.

Conclusion

 OUTLOOK

The online grocery industry is one of the fastest growing industries in the world. Goodfood management has stated that its strategy is in part to delay short-term profitability in order to invest in long-term shareholder value creation. Goodfood’s strategy continues to focus on growing its subscriber base while investing in improving its cost structure to achieve its long-term margin goals. Mangement believes that growing Goodfood’s subscribe base, market share, scale and product offerings will allow the company to deliver greater value to its customers while attaining high returns on invested capital. As the company grows its subscriber base, management is confident that Goodfood will achieve economies of scale and additional efficiencies which will lead to improvements in profitability while maintaining an unrivalled experience for subscribers. All “good” in theory, but the company has not proven its model until it can produce at lease one significantly profitable year.

We are impressed by the revenue and subscriber growth, but with a market cap of $180 million and the company yet to post positive earnings or funds from operations, Goodfood just does not meet our criteria for investment at this stage. While it is cash rich from recent financings, the company will continue to burn through cash to grow at its current rate and eventually need to raise more capital, diluting existing shareholders. Goodfood has admirable growth, and a good product which I have sampled, but it is in a competitive space with low historical margins and while it plans to be profitable in the future, planning it and achieving it are two different animals.